Why companies license technology to other companies?

In the previous article I explained why the companies license technology from other companies. Now let’s see why companies license their technologies to other companies. This question is asked by the engineers even more often than the previous one. After all, we developed something unique with lots of effort. So why not start reaping fruits of it alone, instead of offering it to other companies who might compete with you, right?

Reason 1: to increase the audience for your own product

One reason for technology licensing is when the company “opens up” its flagship product for 3rd party integration. By doing so, the company lets other companies to develop software which could interact with the product. This is a unique case, because it requires the purchase and installation of the company product. Therefore if more users are attracted due to this 3rd party component being integrated with the flagship product, the company increases the market and sales for their own product. A classic example would be a “Counter-Strike” computer game, which was developed as a free addon to an aged (at that time) computer game “Half-Life”, which had the SDK available. Because this addon required the copy of Half-Life, many gamers who otherwise would never buy or play Half-Life, were still required to purchase it to play Counter-Strike, thus increasing the sales of it. What makes this case unique is that the company typically not only charges no licensing fees, but also offers incentives to the developers to use the technology.

Reason 2: to make money

The most obvious reason, which people typically keep in mind when discussing technology licensing, is financial. After all, the technology licensing, if done right, can bring the company significant amount of money with relatively little overhead. The company already has built the technology, and is using it internally. Thus the cost of maintaining the technology is already borne by the company, so licensing it would mostly bring pure profits.

Reason 3: to create a standard

Another reason is that a company might want to push its technology to create a new standard (in case such as WEBP). Making the company’s technology standard fortifies the company’s position as the industry leader, which increases the company value. Such licensing would require providing the technology to the community so it could be properly evaluated to ensure that it performs as expected. This would also require clarifying the company’s legal obligations (patent grants, copyrights), as most standards are quite restrictive on what is accepted.

Reason 4: to take a market share from established competitor

Another reason could be to quickly acquire a market share when a company joins a new market which already has an established, dominating player, as it was the case with Google’s Android. Instead of charging premium and trying to compete, the company could offer its technology on least restrictive terms. This may help to attract the other market participants, and thus help the company to quickly grab the market share.

There are many other possible reasons, which are equally valid and valuable, although they are not listed here. This article just tried to focus on the most common technology licensing cases.